The EURO Stoxx 600 banking index fell today and the EUR-USD cross-currency basis swap, a funding gauge, plummeted as fears of a major banking crisis began.
After the post-Brexit collapse in U.K. bank share prices, which saw many lose in excess of 25%, the contagion effect seems to be underway. Credit Suisse AG (CS) and Deutsche Bank AG (DB) have hit record lows, with the latter having to sell shipping debt to bolster capital requirements and Italian banks are at serious risk of defaulting.
EURO Stoxx Banking Index reaching 2011 EU Crisis lows
This morning, Reuters reported that Deutsche Bank is looking to sell $1 billion in shipping debt to reduce its exposure in the sector. “They are looking to lighten their portfolio and this includes toxic debt. It makes commercial sense to try and sell off some of their book,” the Reuters source said. “They are not looking to exit shipping.” Deutsche Bank did not comment.
Italian banks are facing even bigger problems as they have already hit crisis mode. Italian lenders currently hold €360 billion ($395 billion) of bad loans, which equates to one third of all EU bad loans, which they cannot offload. Italian President Matteo Renzi wants to bail out the banks. However, under current EU banking regulations, governments cannot do so without bond holders taking the first hit. Italy’s problem is that the majority of bank bond holders are individual investors.
Italy’s third largest bank, Monte Paschi is on the brink of failure. Its share price is down 99.7% from its 2007 high, and yesterday Italian regulators put a short selling ban on the bank. The ban helped its shares rise 10% today, but its current implied default probability remains at 66%.
The extent of the European banking issue has spread to investors in the U.S. Yesterday, the world’s largest asset manager, BlackRock Inc., downgraded European Banks to a sell.